Treasurys gain; IMF stirs global growth worries

Europe problems ‘not going away,’ says Deutsche Bank’s Pollack

By

DeborahLevine

SAN FRANCISCO (MarketWatch) — Treasury prices rose on Tuesday, pushing yields down for the first session in four, as another report of slowing global growth – this time from the International Monetary Fund – and protests in Greece made traders more skittish about riskier assets.

“We’re having a more risk-off trade, with the IMF downgrading global growth and stocks down quite a bit today,” said Gary Pollack, head of fixed income trading at Deutsche Bank AG’s private-wealth-management unit.

“Europe remains a chronic risk factor for markets. We’re going to have days and weeks when it’s on the front burner and days and weeks when it’s going to move to the back burner. But it’s not going away. At the end of the day it’s a growth problem,” he said.

Merkel goes to Athens

German Chancellor Angela Merkel visited Athens for the first time since the European debt crisis began. She was met by swarms of protesters who were angry about the austerity measures that Germany and other northern countries demanded to give Greece a bailout. See L.A. Times article: Germany’s Merkel arrives in Greece.

The possibility of Greece detaching from the euro zone has again entered the conversation, though Merkel’s visit is seen by some as a sign that's still not what she or Germany want.

Greece isn’t that important in financial terms: The economy is small and a lot of debt is now in the hands of official institutions after regular investors were forced to exchange their holdings. But the continued struggle to take the steps necessary to balance its budget indicates to investors that any future bailouts of other countries could be similarly rocky.

Treasurys were reasonably well bid ”on an array of negative European headlines and a downgrade of the IMF’s global growth outlook,” said bond strategists at CRT Capital Group.

Bidders offered to buy 3.96 times the amount of debt sold — the highest since 1986, according to Stone & McCarthy Research Associates.

The sale was the first of three big auctions this week. Ten-year notes and 30-year bonds will be sold on Wednesday and Thursday, respectively.

Auctions are looked at as a snapshot of investor interest in Treasurys of a certain maturity — which is now strongly influenced by whether the Federal Reserve is buying or selling those securities and how long the Federal Open Market Committee keeps interest rates near zero.

“The active 3-year note has held to a range of roughly 0.28% to 0.42% since mid-April,” said John Canavan, a bond market analyst at Stone & McCarthy. The Fed’s latest statement that pushed rate-hike expectations to mid-2015 “should keep those ranges intact for the foreseeable future.”

Yields have been exceedingly low, touching their lowest ever in recent months, as lackluster economic data prompted the Federal Reserve to again expand its bond-purchase program to buy mortgage-backed debt.

Investors are worried about whether even slow growth can survive threats from Europe's sovereign debt crisis and a potential hit from expiring U.S. tax and spending measures at the end of the year.

“Rates will likely stay in lower rate ranges into 2013, given the widely known uncertainties up ahead” and less debt issuance, said Bill O’Donnell, head of Treasury strategy at RBS Securities.

“Once past the next six months or so of uncertainty, rates and growth could rebound given that the U.S. economy (housing, bank and household balance sheets, energy industry renaissance) continues its repair,” he wrote in a note. “That’s a risk we can’t shake and that’s what makes us circumspect about buying long-end Treasurys at these rate levels.”

Deutsche Bank’s Pollack said the election and outlook regarding the fiscal cliff’s resolution will keep rates in a very narrow range through the end of the year — roughly 1.55% to 1.85% for 10-year yields.

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